<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED APRIL 30, 2000
Offering investors the opportunity for a high level
of current income and preservation of capital
KEMPER INCOME AND
CAPITAL PRESERVATION FUND
"... Preserving capital was challenging as the Treasury
yield curve inverted and the difference in interest
rates between Treasuries and high-quality
corporate debt widened. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
TERMS TO KNOW
8
PORTFOLIO STATISTICS
9
PORTFOLIO OF INVESTMENTS
13
FINANCIAL STATEMENTS
16
FINANCIAL HIGHLIGHTS
18
NOTES TO
FINANCIAL STATEMENTS
AT A GLANCE
KEMPER INCOME AND CAPITAL
PRESERVATION FUND TOTAL RETURNS
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 2000 (UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER INCOME AND KEMPER INCOME AND LIPPER CORPORATE DEBT A
KEMPER INCOME AND CAPITAL PRESERVATION FUND CAPITAL PRESERVATION FUND CAPITAL PRESERVATION FUND RATED FUNDS CATEGORY
CLASS A CLASS B CLASS C AVERAGE*
------------------------------------------- ------------------------- ------------------------- -----------------------
<S> <C> <C> <C>
0.37 0.09 0.01 0.73
</TABLE>
RETURNS AND RANKINGS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
*LIPPER, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE
WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES
AND, IF SALES CHARGES HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS FAVORABLE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF AS OF
4/30/00 10/31/99
.........................................................
<S> <C> <C> <C> <C>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS A $7.85 $8.06
.........................................................
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS B $7.82 $8.02
.........................................................
KEMPER INCOME AND CAPITAL
PRESERVATION FUND CLASS C $7.84 $8.05
.........................................................
</TABLE>
KEMPER INCOME AND CAPITAL
PRESERVATION FUND RANKINGS
AS OF 4/30/00*
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER CORPORATE DEBT A RATED FUNDS
CATEGORY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
.........................................................
<S> <C> <C> <C> <C> <C>
1-YEAR #113 of #139 of #140 of
170 funds 170 funds 170 funds
.........................................................
3-YEAR #95 of #122 of #121 of
136 funds 136 funds 136 funds
.........................................................
5-YEAR #50 of #98 of #94 of
111 funds 111 funds 111 funds
.........................................................
10-YEAR #16 of 41 N/A N/A
funds
.........................................................
15-YEAR #12 of 25 N/A N/A
funds
.........................................................
20-YEAR #13 of 21 N/A N/A
funds
.........................................................
</TABLE>
DIVIDEND AND YIELD REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND AND YIELD INFORMATION FOR THE FUND
AS OF APRIL 30, 2000.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
...........................................................
<S> <C> <C> <C> <C> <C>
SIX-MONTH INCOME: $0.24 $0.21 $0.21
...........................................................
APRIL DIVIDEND: $0.04 $0.03 $0.04
...........................................................
ANNUALIZED
DISTRIBUTION RATE:+ 5.99% 5.19% 5.29%
...........................................................
SEC YIELD:+ 6.13% 5.58% 5.69%
...........................................................
</TABLE>
+CURRENT ANNUALIZED DISTRIBUTION RATE IS THE LATEST MONTHLY DIVIDEND SHOWN AS AN
ANNUALIZED PERCENTAGE OF NET ASSET VALUE ON APRIL 30, 2000. DISTRIBUTION RATE
SIMPLY MEASURES THE LEVEL OF DIVIDENDS AND IS NOT A COMPLETE MEASURE OF
PERFORMANCE. THE SEC YIELD IS NET INVESTMENT INCOME PER SHARE EARNED OVER THE
MONTH ENDED APRIL 30, 2000, SHOWN AS AN ANNUALIZED PERCENTAGE OF THE MAXIMUM
OFFERING PRICE ON THAT DATE. THE SEC YIELD IS COMPUTED IN ACCORDANCE WITH THE
STANDARDIZED METHOD PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION. YIELDS
AND DISTRIBUTION RATES ARE HISTORICAL AND WILL FLUCTUATE.
YOUR FUND'S STYLE
MORNINGSTAR INCOME STYLE BOX
<TABLE>
<S> <C>
[MORNINGSTAR EQUITY STYLE Source: Morningstar, Inc., Chicago, IL. (312)
BOX] 696-6000. The Income Style Box placement is based
on a fund's average effective maturity or
duration and the average credit rating of the
bond portfolio.
THE STYLE BOX REPRESENTS A SNAPSHOT OF A FUND'S
PORTFOLIO ON A SINGLE DAY. PLEASE NOTE THAT STYLE
BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF
RISK AND DO NOT REPRESENT FUTURE PERFORMANCE. THE
FUND'S PORTFOLIO CHANGES FROM DAY TO DAY. A
LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S
MORNINGSTAR CATEGORY, WHICH IS BASED ON ITS
ACTUAL INVESTMENT STYLE AS MEASURED BY ITS
UNDERLYING PORTFOLIO HOLDINGS OVER THE PAST THREE
YEARS. MORNINGSTAR HAS PLACED KEMPER INCOME AND
CAPITAL PRESERVATION FUND IN THE
INTERMEDIATE-TERM BOND CATEGORY. PLEASE CONSULT
THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT
POLICIES.
</TABLE>
<PAGE> 3
ECONOMIC OVERVIEW
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $290 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER,
As we enter summer, there isn't much to complain about. For all the yammering
about the "new" economy, the old economy is doing pretty well. Consumers may
hanker for a new GPS handset or a Palm Pilot, but they lust after a suburban
mansion with a garage big enough to hold their luxury car and SUV -- and state
and local governments are laying old-fashioned asphalt almost as fast as
businesses are building the information superhighway. Satisfying both old and
new desires got the economy off to a fast start in the new century -- GDP growth
rose at an annual rate of more than 5 percent in the first quarter. Even with a
modest slowdown possible in the second half, growth for the year 2000 is likely
to be close to 5 percent.
So everyone is happy, right? Well, almost everyone. Consumers seldom have felt
so confident; businesspeople seldom have behaved so expansively. But there's
still one grump: Federal Reserve Board Chairman Alan Greenspan, who's become
increasingly worried that rapid growth will bring on inflation, and raised
interest rates by half a percentage point (0.50%) accordingly on May 16. The
Fed's move puts the benchmark federal funds rate at 6.5 percent, its highest
level since February 1991, and the more symbolic discount rate at 6.0 percent.
Despite Greenspan's attempt to slow spending by raising interest rates,
consumers are still splurging, and they show few signs of stopping. We know this
because shoppers are buying the big-ticket items they usually purchase early in
a cycle -- items such as personal computers, mobile phones, jewelry, fancy
kitchen appliances, exercise equipment and big boats. Why are consumers still
buying despite Greenspan's attempts to slow their splurging? There are three
answers: deflation, wealth and easy credit.
Falling prices have made big-ticket items almost irresistible. Since 1997,
prices of kitchen appliances have fallen 4.5 percent, TVs and VCRs 16 percent
and sporting equipment 6.5 percent. Even auto showrooms no longer produce
sticker shock, and drivers have responded with gusto, buying a record 16.9
million cars and light trucks in 1999. 2000 is likely to be the first year in
which automotive sales top 17 million.
Some of that spending has been made possible by stock market gains: Wall
Street has handed out windfalls to almost anyone holding equities in the past
few years. But consumers who don't own stocks are also spending, thanks to a
decade of debt. Young, poor or new to America? In the 1990s, it didn't matter;
lenders still loved you. While high-income families have been borrowing less,
those lower on the income scale have been borrowing more.
But it's not just consumers that Greenspan is concerned about; businesses are
splurging as well. During 1999, businesses increased spending on computers and
peripherals by 35 percent and spending on communications equipment by 25 percent
(both after adjusting for price declines). Far from slowing down this year, we
expect investment in these two categories to accelerate -- to 40 percent growth
for computers and 30 percent growth for communications equipment.
And just like consumers, businesses are borrowing to buy. You may think that
with booming sales, entrepreneurs are cash-rich and can afford it. But while
1999 saw economy-wide earnings jump 10 percent and profits of Standard and
Poor's (S&P) 500 companies leap nearly 14 percent, internal cash covered less
than 84 percent of capital spending. With the exception of 1998, that's the
lowest on record. Last year alone, corporate debt shot up by more than 11
percent to $560 billion. And new economy companies are no exception; they have
more debt than most people realize, issuing more than half of all convertible
bonds.
All this debt could cause problems. Although we've increased our 2001
inflation outlook to nearly 3 percent -- an entire percentage point higher than
our prediction three months ago -- we're not particularly worried about
inflation. It's the heavy borrowing we're concerned about. Debt continues to
exceed income growth, and when Greenspan succeeds in slowing the economy with
higher interest rates (which he will succeed in doing), all of the debt American
consumers and businesses are taking on could be tricky to handle. Private
financial obligations must be paid with personal income and corporate profits.
When the economy slows, personal income stagnates and corporate profits often
fall -- which makes it harder to pay off those debts. Consumers and businesses
may have to sell their assets to pay off the debt, and they may risk going into
default.
That being the case, a gradual economic slowdown may be in everyone's best
interest. But "gradual" is the key. Both the old and new economy have a lot
riding on the Fed's ability to rein in growth softly and smoothly, because
abrupt slowdowns encourage consumers and businesses to sell assets -- and
perhaps risk bankruptcy -- to pay off debt, as described above.
A gradual slowdown seems to be what the Fed is seeking, but for all of
Greenspan's semi-tough talk, some indicators suggest that monetary policy has
actually been lax. Broad money and credit creation have vastly exceeded
economic activity since 1995, and no central bank can allow that to continue
indefinitely without creating
3
<PAGE> 4
ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND
SHAREHOLDER DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR
DEFLATION, CREDIT EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON
MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR
INVESTMENT RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE
10-YEAR TREASURY RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES.
THE OTHER DATA REPORT YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
<TABLE>
<CAPTION>
NOW (5/31/00) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
10-year Treasury rate (1) 6.40 6.00 5.50 5.60
Prime rate (2) 9.50 8.50 7.75 8.50
Inflation rate (3)* 3.00 2.60 2.30 1.50
The U.S. dollar (4) 4.30 -0.70 -0.90 6.40
Capital goods orders (5)* 17.00 12.30 2.50 14.50
Industrial production (5)* 6.10 3.70 2.90 5.20
Employment growth (6) 2.60 2.20 2.30 2.60
</TABLE>
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF 4/30/00.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
inflation. If we begin to see higher core inflation, the Fed will have to deal
with all that money it's created in a less gradualist manner -- and that could
get tricky. Financial turmoil accompanied each of the Fed's last two efforts to
slow the economy down. In 1994, there was a bond market meltdown that resulted
in a Mexican debt crisis. After a more timid Fed tightening in 1997, crises in
Asia were followed by problems with Russian debt, Brazilian debt and a large
American hedge fund. We don't think this is a coincidence: The global debt
market is so vast and interconnected that it's highly vulnerable to a rise in
the cost of its basic raw material -- short-term funds.
Let's hope, then, that the Fed can slow the economy without upsetting the
financial applecart, because that could affect everyone. After all, the old
economy and the new economy are wedded in many ways. Much of the money that
flows to IPOs is available because mature industries have borrowed to carry out
mergers and share buybacks. Old economy companies are the biggest customers of
new economy products. And e-commerce sites are all about moving traditional
goods over old-fashioned highways. Despite a lot of talk about old and new,
we're all in this economy together.
Happily, financial markets got some better news along that front in late May
and early June. A range of economic data, from retail sales to mortgage
applications to the all-important employment report, began to point to somewhat
softer economic growth. If the Fed believes that the economy is finally slowing
in response to its tightening, the end of the rate hikes could be in sight.
Markets certainly were willing to believe, and they staged a strong relief rally
in late May and early June. While we don't expect a quick end to market
volatility, a slowdown in growth would be most welcome, and would make the
outlook for both stocks and bonds better for the remainder of the year.
Sincerely,
Scudder Kemper Investments Economics Group
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF THE ECONOMIC ADVISORS OF SCUDDER KEMPER
INVESTMENTS, INC. AS OF JUNE 6, 2000, AND MAY NOT ACTUALLY COME TO PASS. THIS
INFORMATION IS SUBJECT TO CHANGE. NO PART OF THIS MATERIAL IS INTENDED AS AN
INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[ROB CESSINE PHOTO]
ROBERT CESSINE JOINED SCUDDER KEMPER INVESTMENTS, INC. IN JANUARY 1993. HE IS A
MANAGING DIRECTOR AND HAS SERVED AS LEAD PORTFOLIO MANAGER OF KEMPER INCOME AND
CAPITAL PRESERVATION FUND SINCE 1994. HE IS A CHARTERED FINANCIAL ANALYST.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
THE DIFFERENCE IN INTEREST RATES BETWEEN
HIGH-QUALITY, LONG-TERM CORPORATE BONDS AND
COMPARABLE-MATURITY TREASURY BONDS WIDENED TO OVER
200 BASIS POINTS (2.0 PERCENT). WE HADN'T SEEN SUCH
WIDE SPREADS SINCE THE DEPTHS OF THE ASIAN DEBT
CRISIS IN AUGUST 1998.
Q HOW DID THE U.S. BOND MARKET PERFORM DURING THE FIRST SIX MONTHS OF FISCAL
YEAR 2000?
A Preserving capital was challenging as the Treasury yield curve inverted
and the difference in interest rates between Treasuries and high-quality
corporate debt widened. Strong economic growth prompted the Federal Reserve to
raise its short-term interest-rate target three times by a total of 75 basis
points (0.75 percent) to 6.0 percent. Between October 31, 1999, and April 30,
2000, yields for five-year Treasuries increased 60 basis points (0.60 percent)
while yields for long-term bonds fell 20 basis points (0.20 percent). By April
30, 2000, five-year Treasury notes yielded 6.54 percent, 58 basis points more
than 30-year Treasury bonds. Mortgage interest rates for consumers reached their
highest level in three years, but housing and related consumer spending remained
brisk. Consumer credit rose at an 11.2 percent rate in the first quarter of
2000, the fastest pace since 1995. Many bond market professionals anticipate
that, to prevent the economy from overheating, the Fed will raise its
interest-rate target beyond 6.50 percent before the November 2000 national
elections.
Q HOW DID THE KEMPER INCOME AND CAPITAL PRESERVATION FUND DO IN THIS
ENVIRONMENT?
A With dividends reinvested, we preserved capital (all classes at net asset
value) for the six months ended April 30, 2000. However, because we were
underweighted in long-term Treasuries and other government securities such as
mortgages compared with our unmanaged benchmark and our peers, we did not do as
well as either the Lehman Brothers Aggregate Bond index (which rose 1.42 percent
for the period) or the average fund in the Lipper Corporate A Rated Funds
category (which rose 0.73 percent). In January, when the corporate bond market
fell sharply, we were overweighted in corporate bonds because of their
attractive income characteristics and because we had the expectation that
U.S. TREASURY YIELDS
Yields on intermediate Treasuries increased substantially between October 31,
1999, and April 30, 2000.
[LINE GRAPH]
<TABLE>
<CAPTION>
10/31/99 4/30/00
-------- -------
<S> <C> <C>
3-month 5.08 5.81
6-month 5.27 6.1
1-year 5.41 6.15
2-year 5.78 6.67
5-year 5.94 6.54
10-year 6.02 6.22
30-year 6.16 5.96
</TABLE>
SOURCE: BLOOMBERG BUSINESS NEWS.
5
<PAGE> 6
PERFORMANCE UPDATE
corporate bonds would do as well as they did during calendar year 1999. Overall,
corporate bonds provided a total return of only 0.11 percent for the six months
ended April 30, 2000, as measured by the Lehman Brothers Corporate Bond index,
an unmanaged group of private-sector bonds that vary in quality.
Q WHY DID SHORT-TERM BOND YIELDS RISE WHILE LONG-TERM YIELDS FELL?
A Since January, normal relationships between bonds of different maturities
have been obscured. Usually, 30-year bonds provide more yield than securities
maturing in 10 years or less, since they involve more interest-rate risk.
However, this past winter, 30-year bonds rallied after the Treasury announced
plans to reduce auctions and buy back some long-term bonds from investors. When
investors realized that the government's reduction in auctions and buyback
program would reduce the supply of 30-year bonds, these securities suddenly
became a scarce and more prized commodity.
Q DID LONG-TERM INVESTMENT-GRADE CORPORATE DEBT RALLY, TOO?
A No. High-quality, long-term corporate bond prices did not rise as much as
long-term government debt after the Treasury's announcement. In fact, the
difference in interest rates between high-quality, long-term corporate bonds and
comparable-maturity Treasury bonds widened to over 200 basis points (2.0
percent). We hadn't seen such wide spreads since the depths of the Asian debt
crisis in August 1998. Normally, high-quality, long-term corporate bonds yield
125 to 150 basis points more than comparable-maturity Treasuries.
As spreads grew larger, we upgraded the average quality of the fund's
corporate bond portfolio from A+ to AA and maintained a neutral duration
position with respect to our benchmark and our peers. We were mindful of the
fact that the Fed was on the move, and we sought to maximize the fund's
flexibility to respond to dynamic market conditions without taking undue risk.
Q IS THERE ANY WAY TO ESTIMATE HOW MUCH A GIVEN CHANGE IN INTEREST RATES CAN
AFFECT THE RETURN FROM INVESTMENT-GRADE BONDS?
A A 100-basis-point increase in interest rates, a development that
historically has taken at least several months to occur, generally results in a
price decline of approximately 7 percent for a bond or fixed-income mutual fund
that has an average maturity of 10 years. Bond prices and fixed-income mutual
fund net asset values are also affected by market factors such as credit risk.
For the first half of fiscal year 2000, the fund's results were fully in line
with market conditions.
Q WHAT'S YOUR OUTLOOK FOR KEMPER INCOME AND CAPITAL PRESERVATION FUND FOR
THE MONTHS AHEAD?
A A dual dynamic of the Fed's attempting to keep inflation in check and an
overall reduction in bond supply may dictate what happens this year. We could
easily see another 75 basis points in rate hikes, especially given that the
government's March consumer price data showed that inflation was running at its
worst pace in five years. Over the past several years, even small whiffs of
inflation from one or two government statistics that deviate from analysts'
expectations have caused equity and bond prices to rise or fall substantially in
a single day. We believe these overreactions should eventually subside. For that
to happen, however, we believe that U.S. economic growth will have to slow from
its current rapid pace (7.3 percent as measured by Gross Domestic Product).
Given the current environment, we intend to remain somewhat defensive. We are
comfortable that this positioning can allow us to take advantage of increases in
income potential consistent with our efforts to preserve principal. For
investors seeking to reduce the volatility of an overall equity portfolio, we
think the fund could be an attractive alternative.
6
<PAGE> 7
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 5.50 percent is
50 basis points.
CREDIT SPREAD The difference in yields between higher-quality and lower-quality
bonds, typically comparing the same types of bonds. For example, if AAA-rated
corporate bonds yield 5 percent, and BBB-rated corporate bonds yield 6 percent,
the credit spread is 1 percent. When the spread becomes less because the higher
yield drops or the lower yield rises, the spread is said to "narrow." When the
opposite occurs, the spread is said to "widen."
DURATION The interest-rate sensitivity of a fixed-income investment or
portfolio, measured in years. The longer the duration, the greater the
portfolio's sensitivity to interest-rate fluctuations.
FEDERAL FUNDS RATE The interest rate that banks charge each other on overnight
loans. The Federal Reserve Board's Open Market Committee sets a target rate to
either make credit more easily available or tighten monetary policy in an
attempt to avoid economic imbalances such as high inflation.
GROSS DOMESTIC PRODUCT (GDP) The market value of goods and services produced by
a country during a specified period. It acts as a useful gauge when measuring
the strength of an economy, especially when comparing different time periods.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
7
<PAGE> 8
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
TREASURY BONDS AND NOTES 12% 23%
................................................................................
MORTGAGES 14 14
................................................................................
FOREIGN BONDS 3 3
................................................................................
CORPORATE BONDS 55 60
................................................................................
CASH AND EQUIVALENTS 16 --
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
YEARS TO MATURITY
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
1-10 YEARS 80% 70%
................................................................................
11-20 YEARS 6 12
................................................................................
21+ YEARS 14 18
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 4/30/00 ON 10/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 8.9 years 8.7 years
--------------------------------------------------------------------------------
</TABLE>
*PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER INCOME & CAPITAL PRESERVATION FUND
Portfolio of Investments at April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
REPURCHASE AGREEMENTS--0.2% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
State Street Bank and Trust Company,
5.680%, to be repurchased at $725,114
on 05/01/2000 (a) $ 725,000 $ 725,000
----------------------------------------------------------------------------
<CAPTION>
COMMERCIAL PAPER--16.1%
<S> <C> <C> <C> <C> <C> <C>
Bellsouth Telecommunications Corp.,
6.000%, 05/08/2000 7,000,000 6,991,833
Conagra, Inc.:
6.130%, 05/02/2000 4,500,000 4,499,234
6.150%, 05/10/2000 5,000,000 4,992,312
Countrywide Home Loans Corp., 6.080%,
05/09/2000 8,000,000 7,989,191
Dow Chemical Co., 6.000%, 05/04/2000 5,500,000 5,497,250
Enron Corp.:
6.130%, 05/11/2000 4,500,000 4,492,338
6.150%, 05/12/2000 5,000,000 4,990,604
Florida Power & Light Co., 6.010%,
05/01/2000 6,000,000 6,000,000
IBM Credit Corp., 5.990%, 05/01/2000 6,500,000 6,500,000
Pitney Bowes Credit Corp., 6.030%,
05/30/2000 8,000,000 7,961,140
Renaissance Energy, 6.220%, 05/03/2000 3,000,000 2,998,963
Xerox Capital Corp., 6.070%, 05/05/2000 5,000,000 4,996,628
----------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $67,909,493) 67,909,493
----------------------------------------------------------------------------
<CAPTION>
U.S. GOVERNMENT & AGENCIES--24.2%
<S> <C> <C> <C> <C> <C> <C>
Federal National Mortgage Association:
5.750%, 02/15/2008 7,750,000 7,037,930
6.000%, 05/15/2008 15,250,000 14,044,335
Federal National Mortgage Association:
6.500% with various maturities to
05/01/2027 4,086,354 3,822,018
6.000% with various maturities to
04/01/2029 18,386,038 16,645,064
7.000% with various maturities to
08/01/2029 10,247,793 9,881,884
U.S. Treasury Bond:
5.250%, 02/15/2029 9,500,000 8,345,180
6.125%, 08/15/2029 28,400,000 28,466,456
6.250%, 05/15/2030 12,850,000 13,355,905
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCIES
(Cost $104,013,074) 101,598,772
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATIONS--1.6% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Government National Mortgage
Association Pass-thru 7.000% with
various maturities to 04/15/2029 $4,093,058 $ 3,937,010
Government National Mortgage
Association Pass-thru 7.500% with
various maturities to 09/15/2028 2,968,044 2,919,036
----------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL
MORTGAGE ASSOCIATIONS
(Cost $7,230,216) 6,856,046
----------------------------------------------------------------------------
<CAPTION>
FOREIGN BONDS--U.S. $ DENOMINATED--3.0%
<S> <C> <C> <C> <C> <C> <C>
Province of Quebec, 8.625%, 01/19/2005 7,500,000 7,818,150
Repsol International Finance, 7.000%,
08/01/2005 5,000,000 4,716,300
----------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $13,239,161) 12,534,450
----------------------------------------------------------------------------
<CAPTION>
CORPORATE BONDS--54.9%
<S> <C> <C> <C> <C> <C> <C>
CONSUMER DISCRETIONARY--6.5%
Federated Department Stores, Inc.,
8.500%, 06/15/2003 4,500,000 4,567,950
May Department Stores Co., 6.875%,
11/01/2005 4,950,000 4,794,273
Park Place Entertainment, Inc., 9.375%,
02/15/2007 3,150,000 3,118,500
Royal Caribbean Cruises, Ltd., 8.250%,
04/01/2005 7,480,000 7,159,707
Target Corp., 7.500%, 02/15/2005 5,000,000 5,021,900
Tricon Global Restaurants, 7.650%,
05/15/2008 2,900,000 2,577,723
----------------------------------------------------------------------------
27,240,053
--------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--1.5%
Bass America Inc., 6.625%, 03/01/2003 1,800,000 1,754,352
Safeway Inc., 7.250%, 09/15/2004 4,500,000 4,398,930
----------------------------------------------------------------------------
6,153,282
--------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--2.1%
Metromedia Fiber Network, Inc.,
10.000%, 12/15/2009 2,250,000 2,154,375
Nextel Communications, Inc., 9.375%,
11/15/2009 3,000,000 2,857,500
Qwest Communications International,
7.500%, 11/01/2008 2,450,000 2,328,970
Sprint Capital Corp., 6.125%,
11/15/2008 1,500,000 1,330,005
----------------------------------------------------------------------------
8,670,850
--------------------------------------------------------------------------------------------------------------------------
FINANCIAL--21.4%
ABN AMRO, 8.250%, 08/01/2009 7,000,000 6,924,120
Associates Corp of North America,
6.210%, 02/22/2002 9,000,000 8,997,654
Chase Manhattan Corp., 5.750%,
04/15/2004 5,000,000 4,686,400
Crestar Financial Corp., 8.750%,
11/15/2004 5,000,000 5,177,250
Den Danske Bank, 6.375%, 06/15/2008 8,250,000 7,817,123
Firstar Bank, 7.125%, 12/01/2009 4,300,000 4,059,329
Fleet Boston Corp, 6.375%, 04/15/2008 2,550,000 2,312,161
Ford Motor Credit Co., 7.375%,
10/28/2009 3,250,000 3,149,250
General Electric Capital Corp., 7.000%,
02/03/2003 5,000,000 4,971,750
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
General Motors Acceptance Corp.:
6.150%, 04/05/2007 $1,750,000 $ 1,585,325
7.750%, 01/19/2010 1,325,000 1,308,530
Goldman Sachs Group, Inc., 7.800%,
01/28/2010 3,200,000 3,164,800
Kansallis Osake Bank, 10.000%,
05/01/2002 5,000,000 5,205,800
Merrill Lynch & Co., Inc., 6.000%,
02/17/2009 1,200,000 1,058,064
National Westminster Bank PLC, 7.375%,
10/01/2009 4,450,000 4,253,666
PNC Funding Corp., 7.000%, 09/01/2004 2,900,000 2,809,143
Prudential Funding Corp, 6.190%,
02/15/2002 9,000,000 8,980,200
Scotland International, 8.800%,
01/27/2004 2,850,000 2,949,750
Svenska Handelsbanken, 7.125%,
03/29/2049 3,950,000 3,648,576
Wells Fargo & Co.:
8.750%, 05/01/2002 5,000,000 5,124,050
6.875%, 04/01/2006 2,350,000 2,226,743
----------------------------------------------------------------------------
90,409,684
--------------------------------------------------------------------------------------------------------------------------
MEDIA--11.3%
British Sky Broadcasting Group PLC,
6.875%, 02/23/2009 5,200,000 4,602,468
Cablevision Systems Corp., 7.875%,
12/15/2007 8,000,000 7,600,000
Charter Communication Holdings LLC,
8.250%, 04/01/2007 4,250,000 3,782,500
Comcast Cable Communications, 8.500%,
05/01/2027 2,400,000 2,435,760
Liberty Media Group, 7.875%, 07/15/2009 3,400,000 3,228,096
News America Holdings, Inc., 9.250%,
02/01/2013 4,100,000 4,326,525
Tele-Communications, Inc., 9.800%,
02/01/2012 12,500,000 14,469,750
Time Warner, Inc.:
10.150%, 05/01/2012 3,000,000 3,433,590
9.125%, 01/15/2013 3,650,000 3,926,195
----------------------------------------------------------------------------
47,804,884
--------------------------------------------------------------------------------------------------------------------------
DURABLES--2.8%
Daimler-Benz NA Holdings, 7.375%,
09/15/2006 4,250,000 4,097,637
Lear Corp, 7.960%, 05/15/2005 8,250,000 7,783,050
----------------------------------------------------------------------------
11,880,687
--------------------------------------------------------------------------------------------------------------------------
ENERGY--3.3%
Petroleum Geo-Services, 7.500%,
03/31/2007 7,500,000 7,101,675
Pioneer Natural Resources Co.: 6.500%,
01/15/2008 1,750,000 1,504,895
9.625%, 04/01/2010 2,900,000 2,929,000
Williams Gas Pipeline Center, 7.375%,
11/15/2006 2,525,000 2,434,630
----------------------------------------------------------------------------
13,970,200
TRANSPORTATION--1.1%
Delta Air Lines:
9.320%, 01/02/2009 3,347,620 3,456,384
7.900%, 12/15/2009 1,350,000 1,262,115
----------------------------------------------------------------------------
4,718,499
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
UTILITIES--4.9%
Alabama Power Co., 7.125%, 08/15/2004 $3,500,000 $ 3,422,440
Cincinnati Bell, Inc., 6.300%,
12/01/2028 3,700,000 2,571,315
Cleveland Electric Illumination Co.,
7.670%, 07/01/2004 5,900,000 5,811,500
Detroit Edison Co., 7.500%, 02/01/2005 4,300,000 4,199,122
Niagara Mohawk Power Corp., 6.625%,
07/01/2005 4,750,000 4,394,510
----------------------------------------------------------------------------
20,398,887
----------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $240,747,043) 231,247,026
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $433,863,987) (b) $420,870,787
----------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(b) The cost for federal income tax purposes was $433,863,987. At April 30,
2000, net unrealized depreciation for all securities based on tax cost was
$12,993,200. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost of
$2,009,090 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $15,002,290.
12 The accompanying notes are an integral part of the financial statements.
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of April 30, 2000 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $433,863,987) $420,870,787
----------------------------------------------------------------------------
Cash 704
----------------------------------------------------------------------------
Receivable for investments sold 4,545,673
----------------------------------------------------------------------------
Interest receivable 6,966,678
----------------------------------------------------------------------------
Receivable for Fund shares sold 274,445
----------------------------------------------------------------------------
Receivable for daily variation margin on open futures
contracts 1,500
----------------------------------------------------------------------------
Other assets 24
----------------------------------------------------------------------------
TOTAL ASSETS 432,659,811
----------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 2,989,110
----------------------------------------------------------------------------
Payable for Fund shares redeemed 924,680
----------------------------------------------------------------------------
Accrued management fee 194,882
----------------------------------------------------------------------------
Accrued distribution services fee 73,109
----------------------------------------------------------------------------
Accrued administrative services fee 52,074
----------------------------------------------------------------------------
Other accrued expenses 315,812
----------------------------------------------------------------------------
TOTAL LIABILITIES 4,549,667
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $428,110,144
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
Undistributed net investment income $ 1,794,036
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment
transactions (12,993,200)
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (45,818,787)
----------------------------------------------------------------------------
Paid-in capital 485,128,095
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $428,110,144
----------------------------------------------------------------------------
NET ASSET VALUE AND OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($317,783,492 / 40,486,921 shares outstanding of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $7.85
----------------------------------------------------------------------------
Maximum offering price per share (100/95.50 of $7.85) $8.22
----------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($84,982,799 /
10,872,064 shares outstanding of beneficial interest, $.01
par value, unlimited number of shares authorized) $7.82
----------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($19,358,988 /
2,468,669 shares outstanding of beneficial interest, $.01
par value, unlimited number of shares authorized) $7.84
----------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($5,984,865 /
762,728 shares outstanding of beneficial interest, $.01
par value, unlimited number of shares authorized) $7.85
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended April 30, 2000 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 17,391,449
----------------------------------------------------------------------------
Expenses:
Management fee 1,229,610
----------------------------------------------------------------------------
Services to shareholders 505,659
----------------------------------------------------------------------------
Custodian fees 10,663
----------------------------------------------------------------------------
Distribution services fees 419,474
----------------------------------------------------------------------------
Administrative services fees 510,647
----------------------------------------------------------------------------
Auditing 18,382
----------------------------------------------------------------------------
Legal 3,640
----------------------------------------------------------------------------
Trustees' fees and expenses 14,924
----------------------------------------------------------------------------
Reports to shareholders 79,504
----------------------------------------------------------------------------
Registration fees 30,464
----------------------------------------------------------------------------
Other 8,529
----------------------------------------------------------------------------
Total expenses, before expense reductions 2,831,496
----------------------------------------------------------------------------
Expense reductions (18,075)
----------------------------------------------------------------------------
Total expenses, after expense reductions 2,813,421
----------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 14,578,028
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (26,779,337)
----------------------------------------------------------------------------
Futures 309,158
----------------------------------------------------------------------------
(26,470,179)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments 13,060,800
----------------------------------------------------------------------------
Futures 8,000
----------------------------------------------------------------------------
13,068,800
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (13,401,379)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ 1,176,649
----------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS YEAR
ENDED ENDED
APRIL 30, OCTOBER 31,
------------- -------------
2000 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 14,578,028 37,236,943
------------------------------------------------------------------------------------------------------
Net realized gain (loss) (26,470,179) (11,349,608)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the
period on investment transactions 13,068,800 (39,633,000)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,176,649 (13,745,665)
------------------------------------------------------------------------------------------------------
Distributions to shareholders:
From net investment income:
Class A (10,315,938) (29,322,003)
------------------------------------------------------------------------------------------------------
Class B (2,410,152) (5,576,571)
------------------------------------------------------------------------------------------------------
Class C (517,199) (976,857)
------------------------------------------------------------------------------------------------------
Class I (196,646) (461,927)
------------------------------------------------------------------------------------------------------
(13,439,935) (36,337,358)
------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 37,878,780 196,781,096
------------------------------------------------------------------------------------------------------
Reinvestment of distributions 9,218,367 21,437,089
------------------------------------------------------------------------------------------------------
Cost of shares redeemed (102,915,050) (366,000,827)
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share
transactions (55,817,905) (147,782,642)
------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (68,081,191) (197,865,665)
------------------------------------------------------------------------------------------------------
Net assets at beginning of period 496,191,335 694,057,000
------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $1,794,036 and $655,943, respectively) $ 428,110,144 496,191,335
------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE> 16
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLES INCLUDE SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
(UNAUDITED)
SIX MONTHS
ENDED
APRIL 30, YEARS ENDED OCTOBER 31,
----------- -----------------------------------------------------------
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.06 8.67 8.54 8.46 8.62 7.91
-----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .26(a) .51(a) .53 .57 .58 .61
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.23) (.63) .14 .08 (.15) .72
-----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .03 (.12) .67 .65 .43 1.33
-----------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income (.24) (.49) (.54) (.57) (.59) (.62)
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.85 8.06 8.67 8.54 8.46 8.62
-----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .37* (1.45) 8.13 8.00 5.17 17.47
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 317,783 371,363 563,571 514,558 484,005 535,786
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.03** 1.08 1.01 .97 .96 .90
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.03** 1.07 1.01 .97 .96 .90
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.50** 6.05 6.17 6.75 6.90 7.31
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 170** 108 121 164 74 182
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
(UNAUDITED)
SIX MONTHS
ENDED
APRIL 30, YEARS ENDED OCTOBER 31,
----------- -----------------------------------------------------------
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.02 8.64 8.51 8.43 8.59 7.90
-----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .22(a) .43(a) .46 .49 .50 .51
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.21) (.63) .14 .08 (.15) .72
-----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .01 (.20) .60 .57 .35 1.23
-----------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income (.21) (.42) (.47) (.49) (.51) (.54)
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.82 8.02 8.64 8.51 8.43 8.59
-----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .09* (2.37) 7.20 6.99 4.20 16.12
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 54,983 97,975 106,171 83,295 76,437 97,425
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 1.85** 1.93 1.88 1.90 1.93 1.81
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 1.85** 1.92 1.88 1.90 1.93 1.81
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.69** 5.20 5.30 5.82 5.93 6.40
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 170** 108 121 164 74 182
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS C
(UNAUDITED)
SIX MONTHS
ENDED
APRIL 30, YEARS ENDED OCTOBER 31,
----------- ---------------------------------------------------
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.05 8.66 8.53 8.45 8.61 7.90
---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .23(a) .44(a) .46 .49 .50 .53
---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions (.23) (.62) .14 .08 (.15) .72
---------------------------------------------------------------------------------------------------------------------
Total from investment operations -- (.18) .60 .57 .35 1.25
---------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income (.21) (.43) (.47) (.49) (.51) (.54)
---------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.84 8.05 8.66 8.53 8.45 8.61
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .01* (2.19) 7.20 7.03 4.23 16.45
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 19,359 19,875 16,759 9,083 5,611 4,860
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.75** 1.82 1.86 1.86 1.90 1.78
---------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.75** 1.82 1.86 1.86 1.90 1.78
---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.78** 5.30 5.32 5.86 5.96 6.43
---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 170** 108 121 164 74 182
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS I
(UNAUDITED)
SIX MONTHS
ENDED
APRIL 30, YEARS ENDED OCTOBER 31, JULY 3 TO
----------- -------------------------------------- OCTOBER 31,
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $8.05 8.67 8.53 8.45 8.61 8.52
----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .27(a) .53(a) .56 .59 .60 .19
----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.22) (.63) .15 .08 (.15) .12
----------------------------------------------------------------------------------------------------------------------
Total from investment operations .05 (.10) .71 .67 .45 .31
----------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income (.25) (.52) (.57) (.59) (.61) (.22)
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $7.85 8.05 8.67 8.53 8.45 8.61
----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN % (B)(C) .68* (1.23) 8.62 8.26 5.45 3.65*
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
Net assets, end of period ($ in thousands) 5,985 6,578 7,556 6,534 6,945 11,356
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions
(%) 0.68** .71 .66 .70 .72 .62**
----------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions
(%) 0.68** .71 .66 .70 .72 .62**
----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.85** 6.41 6.52 7.02 7.14 6.87**
----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 170** 108 121 164 74 182**
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of sales charge.
(c) Total return would have been lower had certain expenses not been waived.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Kemper Income and Capital Preservation Fund (the
"Fund") is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an
open-end, diversified management investment company
organized as a Massachusetts business trust.
The Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an
initial sales charge. Class B shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert
into another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with generally accepted accounting
principles which require the use of management
estimates. The policies described below are
followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Investments are stated at
value. Portfolio debt securities purchased with an
original maturity greater than sixty days are
valued by pricing agents approved by the officers
of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used.
Money market instruments purchased with an original
maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
FUTURES CONTRACTS. A futures contract is an
agreement between a buyer or seller and an
established futures exchange or its clearinghouse
in which the buyer or seller agrees to take or make
a delivery of a specific amount of a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund
purchased interest rate futures to manage the
duration of the portfolio. In addition, the Fund
also sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is
required to deposit with a financial intermediary
an amount ("initial margin") equal to a certain
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
percentage of the face value indicated in the
futures contract. Subsequent payments ("variation
margin") are made or received by the Fund dependent
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
changes in the value of the securities or
currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged
positions during the term of the contract.
REPURCHASE AGREEMENTS. The Fund may enter into
repurchase agreements with certain banks and
broker/dealers whereby the Fund, through its
custodian or sub-custodian bank, receives delivery
of the underlying securities, the amount of which
at the time of purchase and each subsequent
business day is required to be maintained at such a
level that the market value is equal to at least
the principal amount of the repurchase price plus
accrued interest.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes
and no federal income tax provision was required.
At October 31, 1999, the Fund had a net tax basis
capital loss carry forward of approximately
$19,357,000 which may be applied against any
realized net capital taxable gains of each
succeeding year until fully utilized or until
October 31, 2002 ($5,031,000), October 31, 2003
($2,953,000) and October 31, 2007 ($10,327,000),
the respective expiration dates, whichever occurs
first.
DISTRIBUTION OF INCOME AND GAINS. Distributions of
net investment income, if any, are made monthly.
Net realized gains from investment transactions, in
excess of available capital loss carryforwards,
would be taxable to the Fund if not distributed,
and, therefore, will be distributed to shareholders
at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from generally accepted accounting
principles. As a result, net investment income
(loss) and net realized gain (loss) on investment
transactions for a reporting period may differ
significantly from distributions during such
period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital
accounts without impacting the net asset value of
the Fund.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Realized gains and losses from
investment transactions are recorded on an
identified cost basis.
All discounts are accreted for both tax and
financial reporting purposes.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of 0.55%
of the first $250 million of average daily net
assets declining to 0.40% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $1,229,610 for the six
months ended April 30, 2000.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended April
30, 2000 are $12,581.
For services under the distribution services
agreement, the Fund pays KDI a fee of 0.75% of
average daily net assets of Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees and CDSC received by KDI
for the six months ended April 30, 2000 are
$576,513.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to
0.25% of average daily net assets of each class.
KDI in turn has various agreements with financial
services firms that provide these services and pays
these firms based on assets of fund accounts the
firms service. Administrative services fees paid by
the Fund to KDI for the six months ended April 30,
2000 are $510,647, and of which $613 was paid to
KDI affiliates.
SHAREHOLDER SERVICES AGREEMENTS. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $363,948
for the six months ended April 30, 2000.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended April 30,
2000, the Fund made no payments to its officers and
incurred trustees' fees of $14,924 to independent
trustees.
--------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended April 30, 2000, investment
transactions (excluding short term instruments) are
as follows:
Purchases $366,914,535
Proceeds from sales 489,780,979
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4
CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund:
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2000 OCTOBER 31, 1999
-------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 2,500,953 $ 20,013,210 14,580,650 $ 123,394,538
-----------------------------------------------------------------------------------
Class B 1,473,193 11,743,298 6,762,575 56,993,635
-----------------------------------------------------------------------------------
Class C 729,815 5,806,616 1,762,084 14,749,871
-----------------------------------------------------------------------------------
Class I 39,719 315,656 193,427 1,643,052
-----------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 868,661 6,901,273 1,938,830 16,192,394
-----------------------------------------------------------------------------------
Class B 221,358 1,752,140 501,483 4,172,048
-----------------------------------------------------------------------------------
Class C 46,411 368,309 73,482 610,689
-----------------------------------------------------------------------------------
Class I 24,758 196,645 55,338 461,958
-----------------------------------------------------------------------------------
SHARES REDEEMED
Class A (9,139,887) (72,719,326) (36,036,959) (297,469,860)
-----------------------------------------------------------------------------------
Class B (2,917,496) (23,081,236) (6,664,185) (55,199,247)
-----------------------------------------------------------------------------------
Class C (776,989) (6,172,804) (1,300,801) (10,803,243)
-----------------------------------------------------------------------------------
Class I (118,417) (941,684) (303,829) (2,528,477)
-----------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 114,378 909,594 673,550 5,696,942
-----------------------------------------------------------------------------------
Class B (114,878) (909,594) (676,190) (5,696,942)
-----------------------------------------------------------------------------------
NET INCREASE (DECREASE) FROM
CAPITAL SHARE TRANSACTIONS $(55,817,905) $(147,782,642)
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
5
EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the period, the Fund's custodian
fees and transfer agent fees were reduced by $2,826
and $15,249, respectively, under these
arrangements.
--------------------------------------------------------------------------------
6
LINE OF CREDIT The Fund and several Kemper funds (the
"Participants") share in a $750 million revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is allocated
pro rata among each of the Participants. Interest
is calculated based on the market rates at the time
of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the
agreement.
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JOHN W. BALLANTINE MARK S. CASADY CAROLINE PEARSON
Trustee President Assistant Secretary
LEWIS A. BURNHAM PHILIP J. COLLORA BRENDA LYONS
Trustee Vice President and Assistant Treasurer
Secretary
LINDA C. COUGLIN
Trustee JOHN R. HEBBLE
Treasurer
DONALD L. DUNAWAY
Trustee ROBERT C. CESSINE
Vice President
ROBERT B. HOFFMAN
Trustee ANN M. MCCREARY
Vice President
DONALD R. JONES
Trustee KATHRYN L. QUIRK
Vice President
THOMAS W. LITTAUER
Trustee and Vice President LINDA J. WONDRACK
Vice President
SHIRLEY D. PETERSON
Trustee MAUREEN E. KANE
Assistant Secretary
WILLIAM P. SOMMERS
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
.............................................................................................
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
.............................................................................................
TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, MO 64105
.............................................................................................
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com
</TABLE>
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unless preceded or accompanied by a
Kemper Income Funds prospectus.
KICPF - 3(6/25/00) 1114170
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
